埃特莫斯能源 (ATO) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Atmos Energy Corporation first quarter earnings conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. [OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Susan Kappes, Vice President of Investor Relations and Corporate Communication. Please go ahead.

Good morning, everyone. Thank you for joining us.

This call is open to the general public and media, but designed for financial analysts. It is being webcast live over the internet. We have played slides on our website that summarize our financial results. We will not review those slides in detail but we will be happy to take any questions about them at the end of our remarks. If you would like to access the webcast and slides, please visit our website at atmosenergy.com. and click on the conference phone link. Also, we plan to file the Company's form 10-Q this afternoon.

With me today are Bob Best, Chairman, President and CEO; and Pat Reddy, Senior Vice President and CFO. There are other members of our leadership team to assist with questions as needed.

As we review these financial results and discuss future expectations, please keep in mind that some of our discussion might contain forward-looking statements within the meaning of the Securities Act and the Securities Exchange Act. Any forward-looking statements are intended to fall within the Safe Harbor rules in the Private Securities Litigation Reform Act of 1995.

With that, I'll turn the call over to Bob Best, who will review the highlights of our fiscal 2006 first quarter. Bob?

Thank you, Susan. Good morning, everyone. We thank you for joining us this morning. We appreciate your interest in Atmos Energy.

Later today we're going to hold our annual shareholders' meeting here in Amarillo and it is only fitting that in our 100th year of existence this year's meeting returns to Amarillo, where our company originated. We are pleased to report to our investors listening on this call and to those at our annual meeting later this morning, our solid results in the first quarter of fiscal 2006.

Pat Reddy, our Chief Financial Officer, will review the financial results in detail in just a few moments. But before he does, I want to make a few comments about the quarter.

Yesterday after the market close we reported that our net income in the first quarter of fiscal 2006 rose 19% to $71 million. The net income distribution was split 68% from the utility and 32% from our non-utility segments. Earnings per diluted share were $0.88 this quarter, up from $0.79 a year ago.

We also were pleased to announce our 89th consecutive cash dividend. Our indicated annual dividend rate for fiscal 2006 is $1.26 a share. The current yield is about 5%.

At quarter end our debt to capitalization ratio reached 61.9%, mainly because of higher short-term debt outstanding used to purchase natural gas at significantly higher prices. I'll remind you that this ratio typically peaks at the end of our fiscal first quarter. However, let me continue to assure you that we are committed to reducing our debt to a range of 50 to 55% within the next two to four years.

We continue to maintain investment grade ratings with each of the rating agencies and we certainly continue to dialog with them on our progress. In fact, just recently Fitch made an upward revision on its outlook from negative to stable and Standard & Poor's affirmed its triple-B corporate credit rating on Atmos.

Our projects on the Atmos pipeline, Texas, continue to progress on schedule. The first half of the Dallas-Fort Worth metroplex north side loop expansion project was completed and placed into service last December. This was about 21 miles of pipeline in the northern portion of the Dallas area, and we expect that the remainder of the pipeline will be constructed and placed in service by March 31st of this year. The expenditure is eligible for GRIP recovery, where it would earn the pipeline's allowed rate of return.

The three other compression projects announced in 2005, the Enbridge, Devon, and Katy project, which will support the system's need for additional capacity, are moving forward as anticipated. The four projects combined are projected to provide incremental annual revenue in fiscal 2006 of almost $7 million.

The pipeline has certainly been a diamond in the rough for us and we continue to explore these types of opportunities which can create value both for the customer and our shareholders.

Now, Pat Reddy, our Chief Financial Officer, will review the complete financial results for the quarter, and when he finishes I'll be back to summarize and make a few closing comments. Pat?

Thanks, Bob, and good morning.

As Bob said, the quarter truly was exceptional. For the first quarter of our fiscal 2006, Atmos Energy delivered $71 million of net income or $0.88 per diluted share compared with 59.6 million of net income or $0.79 per share in the same period a year ago.

Our weighted average number of diluted shares outstanding increased by about 5 million quarter-over-quarter as a result of issuing equity in October 2004 to partially fund our TXU Gas acquisition.

We experienced a 31% increase in our utility results during the first quarter of this year, largely due to weather that was 7% colder than the same period last year. However, weather was still 7% warmer than normal in our jurisdiction as adjusted for weather-normalized rates and negatively affected our gross profit by $8 million.

Weather in our Mid-Tex division alone, which does not have weather-normalized rates or margin decoupling in the current rate design, was 17% warmer than normal and accounted for a little more than half of the decline in gross profit.

Once again, we are reminded of the critical rate design issues in this jurisdiction and we are continuing to address all options to better insulate us from warm weather and continuing consumer conservation.

Additionally, for fiscal 2006 we budgeted the impact of Hurricane Katrina to reduce our gross profit by about 10 to $12 million and in our first quarter we realized about 2 million -- 2.5 million, excuse me, of that gross profit reduction. Currently there are still roughly 25,000 residential customers that are not taking service from our system and about a thousand commercial customers in the affected areas in Louisiana. Additionally, the customers that have returned are not using as much gas as they previously did.

Offsetting the negative impact of weather and the Katrina losses of the utility during the first quarter was a continued outstanding performance of our non-utility businesses. Our non-utility operations added over 22 million of net income for the quarter, or roughly $0.28 per diluted share. Of that, our natural gas marketing segment contributed over $11 million or about $0.14 per share, largely due to the significant market volatility that we saw during this period.

And the pipeline and storage segment contributed over 11 million of net income for the quarter and $0.14 per diluted share.

Now I'll take a minute to review our drivers of earnings quarter-over-quarter. Consolidated gross profit for this first quarter increased $25 million to 347 million, or an 8% increase compared to the same period a year ago. For the quarter, utility gross profit was 280 million, an increase of about 9%, driven partially by an expanded WNA season and higher rates in Mississippi of about $2 million and higher throughput of about 7 Bcf, largely due to 7% colder weather this year over last year. Utility gross profit was negatively impacted by about 2 million from Hurricane Katrina, as I just mentioned.

Natural gas marketing gross profit for the quarter was 26 million, basically flat quarter-over-quarter. However, the outstanding operating results that were achieved are being masked by the effect of noncash mark to market losses recorded and as a result, a simple comparison is not sufficient to clearly tell the story. So let me give you a little more color.

We experienced an increase in realized storage and marketing margins of almost $40 million over last year's quarter, largely due to our ability to capture favorable arbitrage spreads in our storage operations, as a result of unprecedented market volatility during the quarter as compared to last year, and we saw an increase in our marketing sales volumes of about 11 DCF quarter-over-quarter at margins in excess of the prior year quarter, again due to volatility in the aftermath of the hurricanes.

More than offsetting the realized gains was an unfavorable mark to market effect associated with the prices used to mark our physical storage inventory, combined with about a 6 BCS increase in the physical storage inventory quarter over quarter. As we've said before, with the incremental storage that we acquired in fiscal 2005 we are exposed to increased volatility in our margins. However, this is just a snapshot of market value at a particular point in time and when this gas is cycled from storage and the financial hedges are settled as planned, these marks are eliminated. However, at the end of the fiscal year our storage book could add significant unrealized gains or losses to our storage margins.

We quantify the embedded value of our storage book in our 10-Q and also in the appendix to our slide presentation. This shows the difference between the economic value, which is what we use to manage the business, and the GAAP reported value at the end of a reporting period. At December 31, 2005, the economic value of our volumes held in storage was about 7 million. The GAAP value recorded in unrealized trading margin was an unrealized loss of 39 million, yielding an embedded margin of about $46 million. The recognition of this 46 million in earnings is currently expected to straddle two fiscal years and it's dependant on executing our planned withdrawal and injection schedule from which these values are derived.

Our pipeline and storage segment saw gross profit improve by about $2 million from the prior year period, largely due to incremental transportation volumes on our Atmos pipeline Texas system, combined with higher margins.

Turning now to our operating expenses, consolidated operation and maintenance expense for the first quarter was 108 million, down almost 3 million from the same period a year ago. The provision for doubtful accounts increased by about $1 million, primarily at our Mid-Tex division.

High gas prices and gas price volatility remained a major challenge. And although our provision for doubtful accounts went up slightly, the warmer weather in our largest division, Mid-Tex, clearly shields us from a more significant rise in uncollectables.

We experienced almost a $7 million decrease in contract labor. The outsourcing agreements we made during the TXU Gas acquisition with both Capgemini and Encore for the administrative and meter reading functions were terminated on September 30, 2005, as planned. On the first day of our new fiscal year these services were brought in-house and now operate on the Atmos platform. The billing system was the last major conversion from the TXU Gas acquisition.

We did, however, see overall labor and benefits rise almost $4 million in the current quarter versus the same period a year ago. The quarter also reflects about a $2 million decrease due to the absence in the current quarter of merger and integration costs that were amortized in connection with our United Cities Gas acquisition. Those expenses became fully amortized in December, 2004.

Further, we experienced a 2 million increase in Hurricane Katrina-related losses, primarily as a result of some additional accruals we felt were prudent for anticipated losses that we thought originally might be recoverable.

Taxes other than income taxes in the quarter were about $45 million, up 17% from the same period a year ago. But this increase is due to increased franchise fees and state gross receipts taxes that are a percentage of higher revenues and these are offset in our operating revenues, resulting in no permanent effect on net income.

Interest charges for the quarter were up about $36 million or 11% from the same period a year ago. Interest expense was up almost 5 million, mainly due to higher short-term debt used to buy natural gas at much higher prices this season, combined with an increase in the three-month LIBOR rate, which translated into a 200 basis point increase on the rate used to -- on our 300 million unsecured floating rate senior notes.

Partially offsetting this increase was a million dollar reduction in interest as a result of the early payoff of 72 million of first mortgage bonds last June.

Turning to our cash flow for the quarter, we experienced an operating net cash outflow of about $195 million compared with cash inflows of 68 million in the same period a year ago. This swing reflects the adverse impact of high natural gas costs on our working capital management efforts. Despite the timing of payments which favorably affected our operating cash flow by 284 million for the quarter, we experienced cash outflows of $427 million from increases in accounts receivable. Cash outflows of about 85 million from a 42% increase in our weighted average cost of gas and 55 million of cash outflows due to the lag in collecting this gas cost from consumers through utility rates.

Looking at our capital expenditures, those expenditures for the quarter were about $102 million compared to 67 million in the same period a year ago, or an increase of 35 million, quarter over quarter. The increase primarily reflects spending associated with our North Side Loop expansion project. We spent almost 18 million for the pipeline in the first quarter of fiscal 2006, with the remainder in other pipeline expansion projects in the Atmos Pipeline Texas division and various capital projects in our MidTex division.

For fiscal 2006, we are projecting total capital expenditures to range between 400 and 415 million. Of that, we expect between 220 and 228 million to be maintenance capital and about 180 to 187 million to be spent on growth projects. Of the expected growth capital spending, roughly 80 million is earmarked for the pipeline projects that Bob mentioned earlier.

Turning now to our earnings guidance for fiscal 2006, we are maintaining our previously announced earnings estimate for the year in the range of $1.80 to $1.90 per diluted share. We are, however, expecting to achieve this level of earnings in a somewhat different manner.

The year-to-date utility results were strong despite a consolidated 7% warmer than normal quarter as adjusted for WNA. But, going into our second quarter, we have already experienced weather that is roughly 50% warmer than normal in the month of January in our Mid-Tex and Louisiana divisions. January was expected to contribute about 15% to our annual budgeted utility growth profit. As you know, the first two quarters of our fiscal year include the greatest number of heating-degree days and produce over 60% of our expected utility gross profit for the year.

Our updated assumptions take actual weather experienced in January and assume 30-year normal weather for the remaining months of February through September at the utilities. And as most of you know, we assume 30-year normal weather in our budgeting process because that is the standard used by our regulatory agencies for purposes of setting our rates.

Additionally, we believe that the impact of warmer than normal weather at our utility can be partially offset by stronger performance in our non-utility businesses. If natural gas prices continue to be volatile and are a challenge for our utility business, they nevertheless can provide positive opportunities for our marketing segment. Therefore, we are projecting a greater margin contribution from our marketing segment this year, in the range of about 80 million to 90 million. Previously this range was 52 million to 68 million for the current fiscal year.

So at this point we still believe we can achieve our earnings targets, albeit with a different mix of contributions from our business units. I look forward to reporting on our continued progress when we review next quarter's earnings results.

Now, once again, here is Bob.

Thank you, Pat.

In closing, I want to make a few more comments on our current year outlook and then we'll be happy to take any questions that you may have.

In 2005 our net income was split 60% from the utility and 40% from the non-utility at the end of the fiscal year. And as pieces have moved in 2006 we anticipate that about 55% of the full-year net income will come from the utility and about 45% from the nonutility. This is driven by the fact that our utility contribution will be lower because of weather, which, as Pat just mentioned, has not been cooperative in our largest territories. But this will be offset by opportunities seen in our marketing business, because of the incredible past price volatility that we've seen in the marketplace.

It's certainly been a solid quarter for our Company. However, it is still evident to us that we need weather mitigation, rate designed mechanisms in both Louisiana and Mid-Tex. We will press for critical rate design changes in both of these divisions and these changes would insulate us from warm weather, consumer conservation, and other factors which negatively impact our earnings. And we will continue to focus on the performance in our utility divisions, whose success is primarily driven by rate design.

In Texas, our GRIP legislation is working well. The gas reliability infrastructure program allows for prompt recovery of capital investments which are needed to maintain our system to serve our new customers. About a year ago we made the first GRIP filings for 2003 and it took some time for these filings to be approved since they were the first of their kind. Subsequent to these initial filings, the Texas legislation was modified and now gives finite timelines on all group filings that we've made.

The Company has received approval on all but one of the GRIP filings we made for calendar year 2003 and 2004 and most are now included in the rate base and we're beginning to earn our authorized rate of return on these invest men. The exception is a 2004 filing we made in west Texas, where -- this filing was rejected by the inside the city limits customers in the west Texas service area, but we have appealed this to the railroad commission. We expect approval will come sometime in March of 2006. We expect to make our GRIP filings for calendar 2005, capital expenditures by the end of March.

We have -- in the Dallas-Fort Worth area and in west Texas, we have received several show-cause orders, and these communities have secured their consultants and attorneys, but at this point there's nothing further to report on these. I think -- we believe that ultimately these filings will result and give us an opportunity to file a full-rate case in both -- in the central and the Mid-Tex division, and will give us a chance to not only show that we do have a deficiency, but to institute rate changes which will help our weather mitigation efforts.

Also our gas costs in the Mid-Tex division for the period November 2000 through October 2003 are currently being reviewed by the Texas Railroad Commission and hopefully we will expect a decision in the near future.

In closing, we do have a wonderful and diverse mix of assets. We have an intrastate pipeline that is doing well and has continued to access a number of commercial opportunities in the year that we've owned it. We've had steady performance from our distribution business. Despite the weather challenges we continue to work on those rate-design changes that I mentioned earlier and I'm confident long-term we will be able to make those changes. And we continue to see superior results from our non-utility business.

We remain committed to growing our earnings. Our goal has been to continue to grow our earnings 4 to 6% a year on average and maximizing the return on our investments, and of course we will continue to focus on paying down debt over time to get us back into the 50 to 55% range. With this earnings growth, and we've been able to achieve that I believe five years in a row, and our attractive dividend we continue to add values for our shareholders.

So with that I'm going to turn it back to Susan and we'll then take questions. Susan?

Thank you, Bob. That does conclude our prepared remarks, so with that, we'll be happy to answer any of your questions.

Ladies and gentlemen, at this time we'll begin the question-and-answer session. [OPERATOR INSTRUCTIONS] [Snir Vershuni] with UBS Securities, please go ahead with your question.

Good morning, guys. Congratulations on what appears to be a great quarter.

We just had two questions here and it's really related to the marketing and trading business. I guess the first question really is, we just wanted to confirm that the business really tries to run a flat book. And, secondly, we kind of wanted to go over the 19 to 24 million that was -- that you guys had put out in the December analysts' meeting as, I guess, the guidance for that -- or the contribution for that division and is that number still valid? As in, you earn quite a bit now and the rest of the year is going to be different? Or do you expect this to be an exceptional year and really that number does come up?

Well, let me just start -- thank you for those questions -- with respect to your question about a flat book, that is the case, we don't do speculative trading. We endeavor every day to close with a flat book and that the gas and storage that we have, we have financial hedges that we put on that are equivalent to those volumes, and really what we're trying to do is capture differences in the forward curve and through our storage optimization program deciding when to cycle that gas out of storage and when to buy flowing gas, et cetera, but we're always maintaining a flat book.

With respect to guidance on the marketing company, our -- we're projecting about $34 million at present as part of that -- the $1.80 to $1.90 range that we've given for the entire fiscal year.

Okay. I guess one last quick question then. Given the volatility we've seen in gas prices in January and I guess coming into February, as well, too, can we kind of expect that this business is looking at potential opportunities in this quarter as well, too?

I might ask J.D. Woodward to address that for us.

Yes. I would say that we are expecting improvements, primarily through mark to market variances, and what we're seeing and we've already seen this at the end of January, is a closing of the spreads that are used to mark the storage and physical position and the offsetting financial position. And you recall, we talked about this in the last quarter, is those spreads from quarter to quarter widen from the prior period mark. That's a negative coming through our income statement. As those spreads start to tighten, that is a positive. So based on what we've seen in January, the relationship between the physical and the forward financials are starting to tighten back up and that will be a positive for us.

Thank you very much.

Our next question comes from Paul Patterson with Glenrock Associates. Please go ahead.

Hi. Can you hear me?

Yes, Paul.

I wanted to follow up on this energy marketing and trading stuff. In your presentation that I was last at it seemed that you guys were expecting 12 to 26 million from trading and 40 to 42 million from marketing, from a total of 52 to 68. And if I understand it correctly, now it is 80 to $90 million? Could you give us an idea about how that is broken down between trading and marketing?

Is this Paul, did he say? Oh, yes, Paul. This is J.D.. Yes, I would say 100% of it in my mind, Paul, is really going to be attributable to the storage book.

It's going to be on the storage. Okay. So -- and that's -- and then -- okay, and before when you had the natural gas, so the storage, which we had when we looked at net income per segment was 31 to $32 million for pipeline and storage? We would expect something in the neighborhood of 10 to -- we would expect something -- what would the net income impact, I guess, be there?

You know, we haven't given that out, Paul. We're just kind of giving you gross margins.

Okay. And do you feel that this is pretty much locked in for this year?

Paul, I would say nothing really in mark to market accounting is locked in. You know, it is our expectation that, again, as we see a more normal relationship between physical prices and the forward financials, which just means we're going to see a little bit tighter spread than what we saw at the end of December. Again, those are positives for us, in the way of P&L impact.

Okay. And then if we could just follow up here, I think I heard you guys say that you were going for a rate case in Texas? Is that correct?

Well, we received a show-cause request from the City of Dallas, which basically requires us to file information with them to justify the present level of rates. We did that and they've hired a consultant to look into it. It showed -- our filings showed that we have a deficiency in the City of Dallas and a broader deficiency state-wide, and we're anticipating that an outgrowth of that process could be that we would file a system-wide rate case in the next few months, not only to correct the deficiency that we have, but to propose margin decoupling and really rate design improvements that, as Bob said, would insulate us from weather effects and customer conservation.

But that material is in preparation and the City has hired a consultant, but really, nothing more at this point has happened there.

Okay. The reason why I -- I under the rate design issues and what have you, that would go through -- a general rate case would make sense on that, but I guess I thought that the GRIP filings themselves would sort of allow you guys to sort of earn a decent return without having to go in for a rate case. Is it rate design issues that are the primary driver here? Or is it something with the GRIP mechanism that isn't actually delivering, I guess, the kind of financial performance that we thought it would?

No, actually, GRIP is working extremely well. This would be unrelated to that and to your point it really would be to improve rate design. We've got a chart in the appendix, I think, of our slides that shows Mid-Tex's sensitivity to weather. Actually it's on page 10 -- or slide 10, and it shows by percentage warmer than normal how many cents per share that is shaved off of our earnings.

And as we mentioned in the first quarter, weather was about 17% warmer for Mid-Tex. According to this chart you can see that at 15% warmer than normal it reduces our EPS by about $0.12. So, then, as we mentioned in January, weather has only been about 45 to 50% of normal in Mid-Tex's service territory, so you can do your modelling as to what the impact of that is. So it would be primarily for rate-design improvement and unrelated to GRIP.

Okay. And then with respect to the -- just finally, elasticity and what you're experiencing or any thoughts that you have with respect to your most recent experience? Obviously, you've had warmer than normal weather, but what have you guys been experiencing there? And could you share with us sort of the impact in those areas that are -- what the impact has been?

I don't know longer term, Paul, what the impact is going to be. We're hopeful that natural gas prices are going to be more in the 6 to $8 range in the spring and summer and going into next winter. Of course, because it has been warm, we have not really cycled much storage. Our storage levels in Mid-Tex, for example are at 91%. But certainly as a result -- we had a decent December. And because commodity prices were high, we've experienced a pretty high call volume at our call centers with customers calling to question the bill and the change year-over-year.

But then again, it's warmed up in January and those bills are going out starting this week, and customers will see some relief.

So I don't know, based on kind of a one or two-month spike whether that will have long-term implications for demand. I think it really, Bob, would depend on where prices settle out later this year and on into next heating season.

No, that is true, Pat. I think we're just -- we're trying to evaluate what impact it has had, but it's been a little bit difficult because, frankly, we had 20 cold days in December and since December 20th it's been averaging about 70 degrees in Texas and Louisiana. So I think until we get back to a steady state, it is going to be a little bit difficult for us to evaluate just what impact it has had on demand

Okay. Great. Thanks a lot.

Our next question comes from Reza Hatefi from Zimmer Lucas Partners. Please go ahead.

Good morning.

Good morning, Reza.

I had a question. You mentioned potential filing in Texas. Is that just the TXU assets or includes the legacy Texas assets?

The filing that we were talking about as a possible rate case and rate design that Pat just talked about would just be the Mid-Tex, the TXU Gas assets. The west Texas assets are operated as a separate division and have their own rate jurisdictions and so they would not be making -- in fact, we have weathered normalized rates in west Texas, so rate design is not the critical issue that it is for us in Mid-Tex.

And do you happen to have a number for us as far as a trailing ROE in the TXU for the past year? I mean, best would be if it is even weather-normalized. I'm not sure if you have that.

No we don't, Reza, and we don't report that separately.

Okay. And as far as the marketing segment, I'm just trying to kind of understand kind of an ongoing earnings. I know -- I think in '04 you earned 17 million, '05, 23 million and this year I think you said about 34 million. So it is obviously on an upward ramp. I'm just trying to kind of make an assumption as far as what we should assume as far as a normalized earnings or margin amounts. Is there any was -- is there any light you can shed on that?

You know, Reza, I think we can kind of hark back to the material we shared with you in December, where we had a range for the marketing margin of about 40 to 42 million. I think that reflected the additional customers that we have signed up, the current level of marketing margins, and then of course what we've seen this year in updating that for you is really unprecedented volatility and I don't think it would be prudent for us to budget that on a go-forward basis. So I think 40 to 42 million would kind of be more in line with what we think that base business is.

So 40 to 42 million, and then should we assume the trading of I guess it was 12 to 26 back in December, something in that nature, as well?

I think that's still ballpark.

Okay. Great. Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Angela Ho with Wachovia Securities. Please go ahead.

Hi there. I don't want to belabor this, but on marketing, if we think about this simplistically, on page 42 you have about 45 million of market spread. So are we saying that probably half of that is going to turn around this year?

Just a second here, let us get to that slide.

What we're saying, Angela, on the expected results for 2006 is that we had a better than expected result for the first quarter. As pointed out in the earnings release, we had a $39 million increase in realized storage and marketing margins in the first quarter. And as J.D. pointed out earlier in the call, we see unprecedented spreads, market spreads of $3.56 at the end of December. And those are unprecedented. What we're anticipating in our guidance is that we have some of those spread values come back and we're able to reverse some of those unrealized losses that we have on the books today.

Okay. And then the other thing is that the slide that you have on page 10, when you talked about Mid-Tex, whether that was warmer than normal -- so for January, Pat, I think you were saying that weather was about 45 to 50% of normal. Just thinking about it, again, very simplistically, if I were to take 40%, that's about -- I don't know, is that 20% that equates to $0.16, that's for the quarter, right? So if I just do a very simple math -- suggesting maybe $0.10 of erosion for quarter 2?

Angela, I think that's something you're doing to have to model. Because the thing that is a little complicated about it, as you know, is that Mid-Tex has declining block rates and a monthly customer charge, and so in modelling that impact it is not linear.

Right. Okay. Okay. In terms of not linear meaning that, what, there is more -- can you explain that a little bit?

The warmer you get the less effect it has, because at some point you're not using gas at all. The curve kind of flattens out.

Oh, I see. So it is more front end loaded.

It's more front loaded. Right. Right.

Okay. Thanks.

You're welcome.

Reza Hatefi, please go ahead with your follow-up question.

I'm sorry if I missed this earlier, but the 45.7 million, over what time span do you expect that to be realized in earnings?

Rick, you want to address that?

Our current storage book covers primarily the remainder of fiscal '06 and fiscal '07, so we see our embedded value straddling two years. But what you have to keep in mind, that since we are in the storage business, we'll always have a storage position, and that position is always going to yield a mark to market number, either a gain or a loss. But back to the embedded value, which is the cash value, we do see that straddling the fiscal '06 and the fiscal '07 periods.

Great. And, Pat, when you mentioned earlier that part of the '06 guidance, net income from marketing was 34 million. Is that marketing and trading 34 million guidance for '06?

Yes, that is the marketing and trading piece.

And trading. Okay, great. Thank you.

This concludes the question-and-answer session. Please go ahead with any closing comments you may have.

Just let me remind you all that a recording of this call is available for replay on our website at atmosenergy.com. We appreciate your interest in Atmos, and thank you so much for joining us. Bye-bye.

Ladies and gentlemen, you may now disconnect.